How to Keep Your Car

Bankruptcy Benefit #1

Bankruptcy can prevent repossession and help you keep your vehicle.

How Repossession Works -- Many loans, including car loans, are made with the lender keeping a security interest ( a right to the property in the event you don’t pay) in the property. In Texas, the lender with the security interest may engage in a process called self help repossession when you are unable to pay. Under self help repossession, the lender must not take the property unless they can do so without breaching the peace. Whether a breach of the peace occurs is dependent on the circumstances of the case. However, it is clear under Texas law that a repo man cannot take a vehicle: (1) by breaking and entering; (2) using threats; (3); carrying a weapon; or (4) when the consumer is present and objects.
 

• Example 1 – Cindy Consumer takes her car to grocery store, parks, and goes inside. After seeing a tow truck pull up to her vehicle she runs outside and tells the repo man to not take her car before the vehicle’s wheels are off the ground. Consumer has objected, and the repo man now cannot take her vehicle at that time without breaching the peace.

• Example 2 – Cindy Consumer has a driveway and a garage in which she can park her vehicle. If consumer parks in the driveway then the repo man will most likely be able to trespass onto her driveway and repo her vehicle. If she parks in her garage and closes it then the repo man will not be able to repo the car because it would be breaking and entering and therefore be a breach of the peace.

How Bankruptcy Prevents Repossession – When the Bankruptcy petition is filed, an automatic stay is implemented which prevents creditors collection activities including the repossession of the vehicle. An important part of the automatic stay is that it applies whether or not the creditor had notice of the bankruptcy filing.

• Example 1 – Consumer files a bankruptcy petition on day 1. On day 2, without knowledge of the petition, lender repossess consumer’s vehicle. Lender has unknowingly violated the automatic stay and will most likely be required to return the vehicle to the consumer.

• Example 2 – Consumer files for bankruptcy and then calls her vehicle lender letting the lender know about her filing. Lender, not aware of bankruptcy laws, gets worried about its collateral--sending the repo man to repossess the vehicle. Consumer is now forced to rent a vehicle and calls her attorney informing him of the situation. Lender has now willfully violated the automatic stay and must return vehicle and will likely have to reimburse consumer for renting the vehicle and consumer's attorney for his cost in pursuing the violation of the stay.

Your Vehicle Under Chapter 7 – Remember that a Chapter 7 Bankruptcy is a liquidation bankruptcy with non-exempt and non-secured assets being liquidated and distributed to creditors who have proved a claim against the consumer debtor. Not everyone qualifies for Chapter 7 Bankruptcy, you must first know your eligilbility. Under Federal Bankruptcy law and Texas law a consumer debtor is allowed to choose between the exemptions allowable under the U.S. Bankruptcy Code or the Texas Exemptions. The U.S. Bankruptcy Code exemptions is a motor vehicle up to $3225. Under the Texas exemption, a consumer is generally allowed to keep a vehicle for each member of the family that count toward the $30,000 single/ $60,000 head of household personal property exemption limits.  Exemption planning can be a very complex issue , make sure to contact The Law Office of William J. Collins for a free consultation regarding your options.

• Example 1 – A single consumer holds a clean and clear title to her vehicle and files for Chapter 7 Bankruptcy. If the consumer chooses the Texas exemption she will be able to keep her vehicle so long the total value of her personal exemptions do not exceed $30,000. If the consumer chooses the U.S. Bankruptcy Code exemptions she will be able to keep her car if it is valued at $3,225 or less. If the car is worth more than $3225, then consumer will have to come up with the difference between the value of the car and the $3225 U.S. Bankruptcy Code exemption allowed. (If car was worth $5000 then consumer would have to come up with $5,000 - $3225 = $1775).

• Example 2 – A single consumer has a vehicle loan for $5,000 and a vehicle that is currently worth $10,000. Like the previous example, the vehicle will fall within the Texas exemptions if that option is chosen. However, vehicle is still subject to a loan balance of $5,000 and can be repossessed after the expiration of the automatic stay if the vehicle is not redeemed or the debt reaffirmed.
  

Redemption under Chapter 7 -- Redemption is a term of art that essentially means buying the collateral (in this case the vehicle) for the amount of the allowed secured claim. In Chapter 7, you will have the right to redeem your vehicle so long as it is tangible personal property, used primarily for household or family use, and has been exempt and abandoned. Due to the Texas exemption laws for vehicles, most all consumers will meet this test. Redemption is a great option for consumers if the consumer can afford to pay the cash to the lender for redeeming the vehicle. However, the essence of filing for Bankruptcy protection is a lack of funds to do such a thing.

• Example 1 – A single consumer has a vehicle loan for $5,000 and a vehicle that is currently worth $10,000. If the vehicle is used for household or family use and has been abandoned by the trustee, then the consumer will have the right to redeem the car for $5,000. If the consumer can come up with the money to pay the vehicle loan company then the loan will then be considered paid off and the consumer will have title to the vehicle and be able to retain possession.

• Example 2 – A single consumer has a vehicle loan for $10,000 and a vehicle worth $5,000. If the same requirements are met above, the consumer will be able to redeem the vehicle for $5,000. This is despite the vehicle loan being at $10,000 because in this case the value of the collateral ($5,000) has set the upper limit of the allowed secured claim. If the consumer can come up with the money to pay the vehicle loan company then the loan will then be considered paid off and the consumer will have title to the vehicle and be able to retain possession.

Reaffirmation under Chapter 7 -- Reaffirmation is essentially an agreement between the lender and the consumer debtor where the debtor agrees to pay a debt that would have otherwise been discharged (click here for a more detailed explanation of discharge). Thus, the debt survives the discharge and if you do not comply with the requirements of the agreement you will be subject to repossession and be subject to payment for the difference between what the lender gets for your vehicle and what you actually owed. Reaffirmation is voluntary on the part of both parties and is negotiable among the parties. To understand your options regarding reaffirmation agreements contact the Law Office of William J. Collins for a free initial consultation.

• Example 1 – A single consumer has a vehicle loan for $5000 and a vehicle worth $10,000. The consumer has filed for Chapter 7 and cannot afford to make a redemption payment of $5,000. Reaffirmation may be a good option for the consumer in order to preserve her $5,000 of equity in the vehicle. If she reaffirms, the debt in the reaffirmation agreement will not be subject to a discharge.

• Example 2 -- A single consumer has a vehicle loan for $5000 and a vehicle worth $10,000. The consumer has filed for Chapter 7 and cannot afford to make a redemption payment of $5,000. Rather than reaffirm, the consumer will be probably be better off by surrendering the car to the creditor.

Bankruptcy Benefit #2

Bankruptcy can lower your monthly payments on your vehicle.

Chapter 13 Bankruptcy – Many consumer debtors will not qualify for Chapter 7 and be forced to file under a Chapter 13 rehabilitation plan. The general premise of a Chapter 13 plan is to enable the consumer debtor to keep his assets in return for a plan to make payments to creditors over a 3 to 5 year period. Chapter 13 gives the consumer the same protections keeping a vehicle from being repossessed. However, it gives the additional advantage of allowing you to lower your payments on your note in certain situations. First, Chapter 13 allows you to extend your payment schedule to the length of the Chapter 13 plan rather than the contractual period of the loan (See example 1). Second, a Chapter 13 plan allows you to lower the interest rate in many situations (See example 2) Finally a Chapter 13 plan allows the debtor to only pay over the length of the plan the current value of the vehicle, called “lien stripping”, if the vehicle was purchased more than 910 days before the filing. (See example 3).

• Example 1 – a single consumer debtor has defaulted on a vehicle loan owing a balance of $10,000 with $1,000 in penalties and interest with 3 years left to run on the note. Consumer debtor proposes a 5 year repayment plan to court that is confirmed. Now consumer debtor gets to pay the amount owed plus penalties over a 5 year term instead of a 3 year term lowering her overall monthly payment on the vehicle note.

• Example 2 – a single consumer debtor goes to a dealership and gets a 3 year loan on a vehicle at 22% annual interest rate. Shortly after, consumer debtor files for protection under Chapter 13 and proposes a plan of 3 years. Consumer debtor can lower her interest rate on her car to a prime interest rate + 1 to 3 interest rate points. Thus, consumer debtor can lower her interest rate from 22% to a rate likely to be around 10% lowering her monthly payments.

• Example 3 -- a single consumer debtor bought a $25,000 vehicle 3 ½ years ago with a 6 year vehicle note at 15% interest rate making her payments about $530 per month. Her current balance on the vehicle loan is $15,000 with the vehicle only being worth $10,000. Consumer debtor files Chapter 13 and has a plan of 5 years. Now consumer debtor will only pay the $10,000 over 5 years at a prime plus interest rate of about 10%. This makes consumer debtor’s payment about $212 per month.